08/ 04/ 2004
by Jeffrey Moses
Ever get that sinking feeling in your stomach toward payday? You know the one. You've got to meet payroll and send out a bunch of other checks besides, but your accounts receivable are lagging behind -- again. Learn how to effectively manage and maintain your cash flow, so you have reserves for those emergency situations -- and the everyday ones.
NFIB's 2004 Problems and Priorities survey indicates that cash flow is one of the top 10 problems that small businesses face across the country. Establishing a cash-flow checklist can help you deal with your money and avoid crises.
Every small business needs to establish a checklist to follow every time a dollar comes in. Depositing incoming cash, checks and credit card receipts is only the beginning of the story. Prudent cash-flow management requires that you maintain an established, systematic procedure for handling deposited income. A systematic approach protects against overlooking immediate payments, assists in allocating for planned future expenses, tightens overall cost analysis, maximizes profitability and helps build retirement accounts.
Whether your company is a home-based business with no employees, a single-location business with multiple employees or a corporation with numerous locations and many employees, you need to establish -- in writing -- a simple, yet detailed, checklist that serves as a guide to you and your bookkeeping staff for what to do with each deposit.
For simplicity and tax purposes, most small businesses can benefit from having one central business account into which all income is deposited. This will facilitate tax calculations and cash-flow reviews.
Establish an account that offers the highest interest possible while allowing immediate initial access to funds. Avoid non-interest accounts like the plague. Over the course of a year, even a modest interest return will be significant for a business that makes deposits regularly.
Once deposits are made into your primary business account, the following sample checklist may prove valuable:
- Move an appropriate percentage of each deposit into your retirement account. Doing so immediately will prevent the money from dribbling away into other uses. It may seem that there’s always something more pressing to spend your money on, but by capturing some of each deposit made, day-by-day and month-by-month, a retirement is built. Ten percent, of course, is recommended. If you can capture a higher percentage, by all means do so. But even if you can capture only 5 percent, it’s better than nothing.
- Move funds into an account designated for estimated taxes. Work with your accountant or business adviser to determine the necessary percentage of each deposit that should be designated for estimated taxes. When you build your estimated tax account regularly instead of waiting until the last minute to gather the money you need, your life will be a lot smoother -- and your cash flow will be more predictable.
- Prepare a complete checklist of all bills you pay regularly. This list should include the date each payment is due. Don’t just put all your bills into a file folder and pay based on the due date indicated on each payment slip. This can lead to missed or late payments. Instead, establish a master list of bills and go by this list each month. These payments can be made from your primary business account or from a separate account established specifically for this purpose. Included in this checklist should be each and every payment you make, including utility payments, loan payments, all lease or rent payments, insurance payments, travel costs and marketing expenses.
- Payroll funds should be transferred from your main account into a separate account. Writing all payroll checks from one account will facilitate record keeping.
- A separate, specific account also should be established for future allocated expenses. Move funds into this account from your primary account. This account should have the highest interest rate possible. You may want to consider establishing Certificates of Deposits, which offer higher rates, for some of your long-term allocated funds. Also, you may want to establish separate accounts for important future expenses. This will help prevent you from “borrowing” the funds for other purposes over the course of time.
Other items on your checklist could include monthly or quarterly reviews of finances for research and development, business investments (into CDs, stock or bonds, real estate, etc.), increased seasonal marketing, added inventory, new business directions (added lines, added services, etc.), added personnel or employee training.
Each item of your checklist should be coordinated with your overall business plan. This will keep your cash flow aligned with business goals. The more strictly you can adhere to your master cash-flow checklist, the more efficient your business will be.
